UK: Offering Shares To Potential Investors And The Limits Of Crowdfunding

Last Updated: 30 November 2010
Article by Tony Watts

People often ask what they can do to approach others for investment. There is a very clear investment process for major companies listed on the stock markets, but what about smaller companies? What steps can you take to secure equity investment in your limited company and how can you ensure you stay the right side of reams of financial services legislation?

Private companies can issue shares to investors, this happens all the time. But there are criminal penalties for failing to comply with the relevant processes and procedures. Compliance requires an understanding of the relevant law, which is very complicated. This note looks at the main areas of concern for a company seeking to issue shares to investors, but each case will turn on its own facts and accordingly you will need to approach how you offer your shares to investors very carefully.

Why can't I just go out and raise the capital I need?

The law starts from the premise that the ordinary person in the street deserves to be protected from people offering investments, and in particular shares, for sale to them. The logic is, that these sorts of investments often require relatively significant sums of money and further that is it not easy for an investor to know at first glance what constitutes a 'good' investment. The law therefore is very prescriptive about what you can do to raise investment.

What does the law say then?

There are actually several overlapping layers of legislation and you will need to comply with them all to avoid committing an offence. European law, companies legislation and financial services rules all apply. The position can usefully be simplified by looking first at how you can lawfully attract the interest of potential investors and then by considering how the investment itself is made.

Attracting potential investors lawfully

Let's assume that you have prepared a general executive summary of your business and now want to approach an investor. The executive summary and any other materials you have prepared are designed to tell investors about the potential investment. As a result (in the eyes of the law) you have prepared an 'invitation or inducement' to subscribe for or buy shares or debt securities (and potentially some other categories of investment). This is termed 'financial promotion'. Financial promotions can be written or oral. Financial promotions must either be communicated or approved by someone who is authorised under the financial services legislation (e.g. an investment bank or an IFA), though this may be expensive and impractical), or financial promotions must be entirely covered by the statutory exceptions. These exceptions cover both what you say and to whom you say it. As mentioned this is a particularly complicated area and there are numerous exceptions. There is not time or space to discuss these in detail, but set out below are the most commonly used exceptions – and these have been simplified, because the exceptions themselves are very complex.

One-off communications – these are highly personalised, non-standardised communications to the person being contacted – this may be more helpful, for example, when you have already lawfully contacted an investor and you are now answering questions about the potential investment.

Communications to some overseas persons – communications can be made to individuals resident outside the UK, but need to be accompanied with a required set of bespoke and tightly drafted conditions and risk warnings. Do note though that this is an exception for the UK laws, you will also need to check the laws of the country in which the communication is being received.

Investment professionals – communications can be made to FSMA regulated persons including investment funds, Venture Capital firms as well as some others. If you are relying on this exception then you should require sufficient evidence that the recipient is an investment professional in the eyes of the law before making the communication and you should place an appropriate warning in the terms required by the legislation on the communication.

High net worth individuals – some communications can be made to wealthy individuals with a sufficiently high income and personal wealth – within the levels set out in detail the legislation. If you are relying on this exception then you will need a certificate (dated not more than 12 months before the communication) following the strict terms required by the legislation that the recipient is a high net worth person before making the communication and again you will need to give strict warnings, usually on the communication. This exception only applies to written communications or oral communications which the potential investor has requested.

Sophisticated Investors – this is similar to the exception relating to high net worth individuals. Communications can be made either to individuals who have certified themselves as sophisticated not more than 12 months before the communication or those who have been certified by an FSMA authorised person as sophisticated not more than three years before the communication. The onus is on you to check the certificate has been issued and yet again, you will need to give further (different) warnings, as part of the communication. If an investor certifies himself as sophisticated, then this only covers investment in unlisted companies, whereas certification by an FSMA authorised persons covers a wider range of investments.

Associations of high net worth or sophisticated individuals – groups of people falling into the preceding two categories.

Untrue statements and giving inaccurate profit forecasts

Lastly in relation to the materials you provide to potential investors, you must avoid making untrue statements and giving inaccurate profit forecasts, and this may lead to you having to compensate investors in certain circumstances. There are also specific criminal offences under FSMA relating to making statements, promises or forecasts which are misleading or untrue. Remember also that if you do not comply with the rules on financial promotions described above, an investor may be entitled to sue you for their money back.

Once I have an interested investor, how can I lawfully offer securities?

Making a financial promotion is just the first step; it is to gauge interest. The next step is the actual and definite offer of the securities themselves. This offer is subject to another layer of legislation.

First there are the Companies Act requirements preventing anyone but public companies from offering securities to the public. Accordingly, your offer must be made only to a limited group of pre-selected recipients or to one recipient.

Second, there are the requirements from Brussels (in the shape of the Prospectus Directive). The general rule is that any offer of "transferable securities" to the public must be made in a prospectus. This is a heavily regulated, long and prohibitively expensive document requiring regulatory approval. The Prospectus Directive will not apply in various circumstances including if:

  • the size of the offer is less than €2.5 million – the legislation provides for aggregation of offers so that not more than that amount is offered in a period of 12 months;
  • the minimum investment is greater than €50,000;
  • the offer is directed only at a maximum number of 100 people in each state in the European Economic Area; or
  • the offer is only made to 'Qualified Investors' (which includes FSMA authorised firms and certain others, including some sophisticated individuals who appear on a register);
  • it may sometimes be possible to structure the securities so that do not qualify as "transferable".

So what about crowdfunding?

The law was designed before the idea of crowdfunding came into being. There is nothing illegal about crowdfunding per se, but to be used lawfully it must comply with all the layers of legislation touched on in this note (this article does simplify the law, there is a lot of detail it does not mention that may well be relevant to your circumstances). If the crowdfunding structure complies with the rules about communications/financial promotions and the rules about offering debt and equity securities (and subject to one point about collective investment schemes below) then it may be fine. But a word a warning: the rules have been designed to regulate and restrict any type of investment or potential investment being communicated to and sold to the public. Therefore, crowdfunding, which relies on many small investments being made by a large number of people, may be in conflict with these rules. This makes it very hard to achieve. Some companies have successfully carried out a type of crowdfunding, but their minimum investment was £10,000 and they have used the exceptions to financial promotions and offers of securities described above. Some others have used the approved prospectus route, looking for small subscriptions of shares or debt securities to a PLC. A third group of companies has stayed away from offering securities and has offered club membership or the like instead but sometimes these face another possible pitfall described below. Each method has its risks and needs to be carefully considered.

Finally, there is one last pitfall to avoid. There is another kind of structure known as a collective investment scheme ('CIS') based on (among other things) pooled investment. Even some companies can fall foul of this if they are regarded as 'open-ended' (a complicated and technical term relating to how shares/investments can be redeemed). The risk is that you inadvertently create a CIS, while looking for funding and in particular crowdfunding. A CIS may only be operated in the UK by an FSMA authorised firm. Breach of the CIS rules is a criminal offence and careful adherence to the rules is advised; if in doubt you will need legal advice.

In summary

  • Know what you are doing, it is easy to risk prosecution through ignorance.
  • If you are advised you need a warning or disclaimer on your communication, then make it prominent and make sure it is the right one, there is no standard wording that works in every situation.
  • Where you are relying on an exception, be sure it actually applies and all necessary certificates etc have been obtained.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Topics
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions